Generative artificial intelligence (AI) is the hottest growth investment theme of 2023. Recent McKinsey AI market estimates of US$2.6 trillion to US$4.4 trillion speak volumes about its sheer size. The huge investment opportunity lies not in just one or two AI stocks as the massive rally in Nvidia (NASDAQ: NVDA) stock would seem to imply. It extends to several stock groups that play vital roles in supporting the fast-growing AI ecosystem.
Basically, three distinct groups of AI stocks have emerged for investors to evaluate as they prepare to unleash their portfolios’ growth potential.
3 ways to invest in AI stocks
The advanced chip manufacturers and their suppliers are at the forefront of the AI ecosystem. They are the nuts-and-bolts plays in the evolving value chain. Nvidia has been the face of this first AI stock group, and rightly so.
Secondly, information technology consulting giants, and their counterparts, could continue to win new business as corporations around the world seek guidance in deploying new AI tools.
The third group of AI stocks that offer outsized investment gains is comprised of software developers. Software engineering groups are tussling with each other to develop and market the best, most seductive, stickiest, most usable, and perfectly functional generative AI platforms for individuals and corporations to adopt.
Surprise! Nvidia stock appears undervalued right now
Generative AI’s rising popularity catapulted the Nvidia stock price to new all-time highs in 2023. Surprisingly, NVDA stock appears undervalued today despite a strong 213% rally so far this year.
Massive growth in AI chips and software sales is underway. Nvidia reported a 101.5% year-over-year surge in quarterly revenue to US$13.5 billion and a rapid 400% increase in quarterly cash flow from operations to $6.3 billion by July 2023.
Bay Street and Wall Street analysts project strong 48.8% growth in Nvidia’s annual sales in 2024 (despite a stronger comparable base year of 2023). Earnings growth could average a staggering 73% per year over the next five years. Nvidia’s forward price-to-earnings (P/E) multiple of 29.5 depicts shares as affordable. While a current price-earnings-to-growth (PEG) multiple of 0.5 implies shares could be undervalued relative to future earnings growth prospects.
That said, it feels like Nvidia is an AI growth stock that has already been “discovered.” Investor returns could be lackluster from here onwards. Its smaller suppliers include Aehr Test Systems (NASDAQ: AEHR). Yet, its close competitor Advanced Micro Devices (NASDAQ: AMD) may offer better value and growth potential to investors’ portfolios.
A significant risk to watch is growing protectionism (de-globalization) as geopolitical events compel countries to starve each other of AI resources. The United States’ recent ban on AI chip shipments to parts of the Middle East and China could be a case in point.
Check out AI consulting firms
The second group of AI stocks to consider is information technology consulting companies. These include CGI Inc. (TSX: GIB.A) and Accenture (NYSE: ACN). Business consulting groups are playing a vital role in leading corporations through the generative AI adoption process. Huge investments have already been budgeted for this endeavour.
Accenture has a US$3 billion AI budget to work through, and CGI recently announced plans to invest a further $1 billion in expanding its AI capabilities. Money could flow in as businesses utilize their offerings to efficiently execute generative AI growth plans.
This group of AI stocks has wide room to grow
Most noteworthy is the third group of AI stocks to check out as individual investors unleash their portfolios’ growth potential with generative AI stocks. AI software developers and platform vendors are vigorously launching ever-improving generative AI models and platforms. However, waters remain murky in this AI stock group. It’s generally hard to predict an ultimate winner among the emerging, and periodically overhyped platforms.
Small privately owned AI software startups, including OpenAI, the developer of ChatGPT, have made significant strides in attracting users to generative AI platforms. However, Microsoft (NASDAQ: MSFT) and Meta Platforms (NASDAQ: META) (the owner of social media platforms Facebook, Instagram, and WhatsApp) could potentially become dominant on the generative AI models front, too. The race is still heating up and investment opportunities still abound.
Most noteworthy, generative AI may have the power to rejuvenate ailing business lines and revive weary corporate souls. Despite slow growth lately, OpenText (TSX: OTEX) is integrating its legacy software platforms and upgrading them with AI capabilities. The company claims to be “driving digital and AI-led innovations specific to high tech, financial services, insurance, utilities, healthcare, and more” as it prepares to present its “case” during a Las Vegas conference in October.
